DOOH NIBOR
There’s a little known historical character called Dooh Nibor. He took from
the poor and gave to the rich. Today, he is Chancellor of the Exchequer. Because
it is now clear that the big losers from Gordon Brown’s recent Budget will be
people aged 50 to 64 who have a low income from earnings or a pension. And the
big winners will be those with incomes over £40,000 who are over 65 or do not
work.
People under 65 with an annual income of less than £18,605 will be worse off as a result of the changes to income tax. Some of the least well off, those with an income of just £7455, will pay £223 a year more tax when the changes begin in April 2008.
Anyone over the age of 65 will gain from the changes. And those who will gain the most are the better off. A 67 year old with an income of £40,000 will pay £424 a year less tax in 2008/09. That will also apply to younger people on high incomes who do not work. And if their money comes from investments they will be £682 a year better off by 2009/10.
It is a crazy, stand on your head, mixed up world when a Labour Chancellor takes £132 more tax from a 61-year-old retired secretary on £12,000 a year and gives £424 in tax cuts to a 66-year-old pensioned off company director on £40,000. It is a transfer of money from the hard up to the well off. Dooh Nibor. Robin Hood backwards.
So how has it happened? In 1999 the Chancellor introduced a new lower rate of tax of 10% for a small layer of income above the tax-free allowance. It was a gesture with a small impact. It cut tax by up to £180 for people on low incomes, though at the price – this is Gordon remember – of making things more complex. Nine years on Gordon will scrap this lower rate, simplifying things but at the price of raising tax for those same low income people.
He will also cut the basic rate of tax on earnings and pensions from 22% to 20%. That simplifies things too because the basic rate charged on interest on savings and investments is already 20%. But the cut only helps if your income is high enough to pay basic rate. And while the tax on the first band of income has doubled from 10% to 20%, the tax on the rest has been cut by far less. So it takes quite a lot of income before the extra tax on the first band of income is balanced by the lower tax on the next band. That balance point is £18,605. If your income is less than that you will lose, higher than that you will gain. Brown tried to protect four groups with incomes below that point.
Those aged 65 or more
He protected the over 65s by increasing their tax free allowance by £1180 above
inflation. That will save them £236 in tax – slightly more than the maximum £223
loss from the rate changes. But most people lose far less than £223 and those
with incomes above £18,605 gain. So the extra £236, which they all get, is very
good news for some. The arithmetic of this change is made much more complicated
by the way the higher tax allowance for people over 65 works. Once income
reaches £20,900 the extra tax allowance is reduced and this year once income
reaches £25,580 or above (£25,830 for the over 75s) it falls to the standard
level of £5225. The extra £1180 will move up the income at which the age
allowance disappears to £27,900 (£28,190 aged 75 or more). The interaction of
these limits means that people aged 65 and over gain an amount which goes up and
down as their income rises. But it ends up at a gain of £424 when income hits
£39,825 or above.
Those with an income from savings
The Chancellor recognised that many of the low income people who would pay
more tax rely on income from savings. So he kept the 10% rate for the first
£2230 of income above the tax free allowances if that income is from savings.
But if you have at least £2230 of income from pension or earnings above your tax
free allowance then any savings income will be taxed at 20% not 10%.
For example, Val Garrett is 62. She has the state pension which is £100 a week which uses up her tax free allowance of £5225. Her savings income of £1000 a year is her only income above her tax free allowance so it will be taxed at 10%. But her neighbour May Flower is 62 and has pensions totalling £8000. She also has income from savings of £2000. She will get her normal tax-free allowance of £5225 but her pensions exceed that by more than £2230 so all her income – pension and savings – above the tax free allowance is taxed at 20%. At this year’s rates, all savings income will be taxed at 10% only if you have pension or earnings of £5225 or less if you are under 65 or £8730 if you are 65 or more. In other cases some – often all – of your savings income will be taxed at the full rate of 20%. Sorry it is so complicated, I didn’t invent the rules!
Those with children
The Chancellor also decided to offset the potential tax rise for people with
children by raising the thresholds for tax credits. The arithmetic indicates he
probably succeeded – if the parent claims their tax credit (nearly one in five
who could do not) and, an even bigger if, the Revenue gets the sums right.
Those in low paid work
Working tax credit (WTC) can be claimed by people without children who do
low paid work for at least 30 hours a week. And there are enhanced rates for
those over 50 for the first year when they return to work. But only six out of
ten of those who could claim WTC in fact do so. The Chancellor announced
increases in WTC but they were not enough to cover the tax loss. A single person
with no children will not get WTC if their annual pay is more than about
£12,600. So there is a thumping great gap between the limit to get tax credits
of £12,600 and the income £18,605 before you stop paying more tax. For example,
Gillian Grove is 59. She works 35 hours a week for £6.95 an hour and earns
£12,650 in the year. In 2008/09 she will pay an extra £119 in income tax. But
she is considered too well off to get tax credits. And of course people who rely
on a pension rather than earnings are excluded from getting tax credits however
low their income.
The rest
Anyone else with a low income and aged less than 65 will not be protected in
any way from the tax hike. One estimate by the Institute for Fiscal Studies
suggests that up to 700,000 women aged 60 to 64 will be hit by it. They are
particularly at risk because although many are retired and on a pension they do
not get the higher tax allowance until they reach 65. Other people are at risk
too. About one in three people over 50 do not work at all relying either on a
pension or a partner. Many of those will have a low income and face a tax hike
from next April.
2009/10
Further changes are planned in 2009/10. These will not affect low income
people at all. But they will cut income tax further for people with incomes
above about £40,000. For those in work the cut will be offset by increasing
National Insurance. But for better off people who rely on pensions it will be
another tax cut of £160 taking their total gain from the Budget changes to £584
a year, more than £11 a week. And those who rely entirely on investments will
gain an extra £682 whatever their age.
Future allowances
The calculations and examples in this article assume that all the changes
happened this year using this year’s tax allowances. Normally allowances rise
each year in line with inflation which the treasury expects to be 3%. And the
Chancellor gave us some future levels for the tax allowance for people aged 65
or more. It will be £8900 in 2008 (including the extra £1180), £9500 in 2010 and
£9770 in 2011. For those aged 75or more it will be £10,000 in 2011. No other
definite figures have been given and of course these figures may be increased in
future budgets. Remember that you get age allowance for the whole tax year if
you reach 65 or 75 at any time in that tax year. So it is available this tax
year 2007/08 to anyone born before 6 April 1943 and the higher rate for the over
75s is available for anyone born before 6 April 1933.
We also know the threshold for Inheritance Tax for three years ahead. It is £300,000 this year and will be £312,000 in 2008/09, £325,000 in 2009/10 and £350,000 in 2010/11.
Winners and Losers
These tables compare the tax position in 2007/08 with the planned position
in 2008/09 assuming allowances do not change in line with inflation.
Tax change 2008/09 compared with 2007/08 |
||
Annual income |
Tax change |
Amount |
Up to £7690 |
None |
£0 |
£7690 to £39,825 |
Cut |
Between £0 and £424 |
£39,825 and above |
Cut |
£424. |
Tax change 2008/09 compared with 2007/08 |
||
Annual income |
Tax change |
Amount |
Up to £7550 |
None |
£0 |
£7550 to £39,825 |
Cut |
Between £0 and £424 |
£39,825 and above |
Cut |
£424. |
Tax change 2008/09 compared with 2007/08 |
||
Annual income |
Tax change |
Amount |
Up to £5225 |
None |
£0 |
£5225 to £18,605 |
Increase |
Between £0 and £223 |
£18,605 to £39,825 |
Cut |
Between £0 and £424 |
£39,825 and above |
Cut |
£424. |
Tax change 2008/09 compared with 2007/08 |
||
Annual income |
Tax change |
Amount |
Up to £5225 |
None |
£0 |
£5225 to £18,605 |
Increase |
Between £0 and £223 |
£18,605 to £39,825 |
Cut |
Between £0 and £324 |
£34,840 to £38,740 |
Cut |
Between £324 and £12 |
£38,740 to £39,825 |
Cut |
Between £12 and £34 |
£39,825 and above |
Cut |
£34.40 |
June 2007